How Long Does It Take to Build a Rig? And Why Aren't Rigs Cat 5 Certified?
Posted by Prof. Goose on September 28, 2005 - 11:55am
At one time there were numerous rig building companies that simply built land rigs. As they closed up shop, the drilling contractors took on building their own rigs. Today, that is where we are.
If they build too many, demand drops and day rates decline. Any mention of potential lower oil prices halts rig building.
Offshore, a jackup rig will take 2-3 years and a semi 3-4 years.
Seeing that we just lost several shipyards along the Gulf Coast, well, the MODU's might have to be made elsewhere, meaning more time. And just like their cousins onshore, offshore rig building slows or stops if there is any hint oil prices might decline...
If you look at the rigs we lost in the Gulf this year, and then remove the 5 going to ARAMCO for their offshore project, we will be a few years just getting back the rigs we lost to the storms, and another few to replace those the Saudis leased. And that just gets us back to the number of rigs we had in 2004...
Murphy's Law is more obvious in a tight market...
On the Cat 5 question:
To survive a 100 foot wave will require platforms or rigs to be built to an extremely rugged standard, similar to Naval Vessels. It would effectively triple the cost, and as most platforms are expected to stay online from 5-10 years, this would drastically alter economics, delivery dates and lead times for projects. It will require the MMS to change rules and standards, which will, in and of itself, take years.
The simplest way would be to raise the structure up by a hundred feet above sea level, but then you place a much larger wind load on everything - it gets complicated in a hurry. But no matter how you slice it up, building for Cat 5 survival will entail more iron and larger structures - which means a lot more capital outlay against the expected reserves.
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http://www.washingtonpost.com/wp-dyn/content/article/2005/09/27/AR2005092701812.html
"customers want big, comfortable cars."
"well, except for the many thousand flocking to those cheap japanese econoboxes"
This could be the death knell for GM, Ford. Dunno about Daimler - don't know why they bought Chrysler - bet they wish they hadn't.
The big three were absolutely trashing high milage cars, especially hybrids. No one will buy them, they are too expensive, they are dangerous in crashes, the technology is not robust enough, they have no acceleration and are dangerous, and on and on.
Funny thing though is that the average hybrid OWNER last year had at least one advanced degree and almost all were convinced that gas prices would rise steeply over the next year. Some consumers were paying attention to energy more than 12 months ago (I put my name in for a Prius Feb 2004) but the big three saw no need for fuel economy until this summer. People don't scoff at the idea of GM going bankrupt now that their bonds are junk status and they have a huge inventory of unsellable SUV's. I can see the same thing happening to the housing market and the economy. This week the MSM and Alan Greenspan are still saying the economy is too robust to be affected by energy prices. I don't believe them.
"Those that don't learn from history are doomed to repeat it"
http://aawsat.com/english/news.asp?section=6&id=1917
Or so they claim on their Web site...
Some people suspect what the Saudis want to do is exploit a known deepwater field that lies mostly in Iraqi territory. Obviously, if you're going to do it, the time is now...when the U.S. military is there to protect your operations.
But this field is not that big, so even if this theory is true, it suggests the Saudi reserves are not what they claim.
Note that in the text they are speaking of "contracting" rigs. They aren't building more drilling rigs, but rather offering higher rates to obtain the rigs from elsewhere on the globe. This "bidding up" escalates throughout the industry, increasing rig rental rates and raising exploration costs. It also delays drilling programs in other areas by creating a temporary rig shortage as contractors accept the more lucrative Saudi bids.
And that implies that they have quite a bit of it still in the ground, relative to the rest of the world.
http://www.rigzone.com/data/dayrates/
and some historical utilization data
http://www.rigzone.com/data/utilization_region.asp
Then you have a crystal ball, and you should share!!
All it really tells you is that they have excellent credit and really good cash flow, which most people already know. ARAMCO is taking the risk, and it will be the first true risk they have undertaken. Everything they have done since nationalization has been stepout drilling or development, which is extremely minimal risk. Remember, this is the first time they haven't been able to simply order more production via valve...
If you read the anonymous insider, there was already a shortage of rigs prior to the ARAMCO 5 and both hurricanes. Now we have lost more rigs and even some shipyards to build them in.
Knowing that, what do YOU think drilling day rates will do?
There is already a huge backlog of major rigs in the pipeline. I know of at least 13 jackups in construction or on the books, as well as 6 semis. The majority of these rigs are built in Singapore or Korea. Other than Rowan's LeTourneau yard in Vicksburg, Mississippi there is not a lot of drilling construction going on in our shipyards. Production, yes. But not drilling.
We are manufacturing land rigs in three countries as fast as we can make them.
Day rates for land and offshore drilling are driving this construction. And it has been going on for the past three years.
Our main problem in manufacturing today is delivery of raw materials (steel) and large commodity items (diesel engines, electric motors, etc).
2 years ago I could order a 600 HP Caterpillar diesel and receive it in 10 weeks. Today it is 36+ weeks. We are quoting deliveries of some large pieces of equipment out to 2008.
So yes, we are building new rigs. A lot of them.
So is there, in effect, a bidding war for rigs? Will the deep pocket big oil folks get all the new rigs, and leave the little companies to fight over the scraps?
There really isn't a bidding war for rigs. Day rates define the market. Those willing to pay get the rig.
For the most part, new drilling rig construction is paid for by the owner (the drilling contractor) not the operator (those who lease it).
There are of course exceptions. Anadarko's leasing of an Ensco semi that has not even been placed on order at the shipyard is an example. But look at the nature of the demand here.
Anadarko has spent millions of dollars on deepwater offshore leases. It has also identified millions of barrels of production to produce from these leases. Which will justify those lease fees.
There's a limited number of rigs that can drill deepwater. They locked in long term to the specific equipment they need. And trust me, they did it at $20-25 oil economics, not our current prices.
When the oil market collapsed in 1982 (and Houston was decimated) there were over 3000 land rigs drilling in the US. The following year 800 were operational. That's a lot of scrap, spare parts, and even capital equipment laying around.
It's all gone now. There is no surplus. There are no refurbs. It's all been sold or cannibalized. We're 3 years in to a major rig manufacturing boom. Driven not only by world oil demand but by the nature of the wells being drilled. Given the destruction of capital equipment by Katrina and Rita, this trend will continue for at least three more years. Speculative rigs based on current day rates as well as capitalization in a market in which supply has shrunk considerably in the last two months.
I relooked at Skrebowski's buildup analysis for forecasting short to midterm oil output from "megaprojects." It's not clear to me if he is detailing it down to rig-by-rig level, or simply estimating field-by-field.
I think we could take the future rigs by delivery date, multiply by an estimated output for each rig, and subtract the known losses from damaged or lost rigs. Shouldn't this give the incremental capacity (if any, given the damage) coming on line? Add it to the existing capacity, including a decline where it's occuring, and we should get to an accurate total output.
I think your mixing and matching drilling and production. A great majority of exploratory wells drilled are not produced. They are drilled to go after a target and to verify seismic and geological data.
If an exploratory well seems promising, further delineation wells will be drilled to determine the extent of the reservoir (again based on seismic and geologic data).
Once this is done the operator will determine whether the field is economically viable. Is it worth the investment dollars to manufacture a production facility and exploit these resources.
The BP Clair field in the North Sea was discovered in the late 1970's. It is just now going in to production.
So mega projects (Sakhalin Island, Shah Deniz, the AIOC consortium) have already been extensively drilled. And now the production facilities are online, they are producing.
Spooky,
You cannot view the rig market on a regional basis. It is a global market. You are correct that thee is a net loss of rigs out of the GoM but the world market stays the same (less the damaged or destroyed rigs).
We've been losing rigs out of the GoM for years. To Brazil, Western Africa, Asia and anywhere else where local demand outstripped local supply.
The 13 jackups I mentioned are projects I'm currently involved in. They do not make up a comprehensive list of all of the newbuild construction occurring worldwide. India and Japan are adding to their own fleets as well. Rowan has built a new high specification jackup every year for the past 8 years. Noble has upgraded fairly basic semi equipment to deepwater class over the past 7 years.
It is going to be a tight market for offshore equipment for a while. Day rates will reflect this. Expect a lot of long term contracts to be signed at generous terms to the drilling contractors in the next few months.
As with every other boom and bust cycle in the oil industry, we are very much on the up cycle. Build, build, build.
If there are 13 jackups on order, and the Gulf of Mexico fleet just lost 5 to ARAMCO and 6 to Rita and Katrina, that pretty much eats up the WIP inventory, doesn't it? It leaves a net gain of 2 jackups for the entire world, right?
And if most of the jackups are built overseas, but the production platforms are built locally, that puts production platform construction behind the 8-ball?
Are these good assumptions?
Do you know if we lost any more rigs in the pacific typhoons this season? Just wondering, because Vietnam has become a drilling hotspot...
I've delivered or I am a part of 90% of that list.
A category 5 event is an order magnitude stronger than a category 4, and two more than an category 3 - correct? So presumably the cost sky rockets if you design for that contingency. That creates a huge disincentive for making the rigs more robust.
I assume the calculation that drives this is mostly about financial flows and insurance rates. The insurance industry may have, in retrospect, been under estimated the likelihood of these events. I assume that will change quickly.
I wonder if these guys buy business interruption insurance too? Raising the quality of the rig is, in effect, a way to buy interruption insurance. You can use geographic diversification to minimize the extent of the interruption cheaper, i suspect.
The oil/gas is still there if you lose the rig. If your fully bought into peak oil then leaving it there for 5-10 years might well be your best course of action. But I doubt that feeds into planing how robust to make your rig.
Finally none of the externalized effects of a low quality rig are relevant to the rig operator. If the Northeast freezes it doesn't effect your bottom line. The only international entity that might force higher quality is the insurance industry. In the US it's hard to image the political will to force it; well until midwinter.
Just insta-theories(tm).
http://www.theoildrum.com/story/2005/9/30/121854/558#comments
IF not, email me and I'l explain, to the best of my ability, futher.